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Deregulation, the Internet, and the Competitive Viability
of Large Banks and Community Banks

Robert DeYoung*
Federal Reserve Bank of Chicago
William C. Hunter*
Federal Reserve Bank of Chicago

forthcoming 2002 in:
The Future of Banking
Editor, Benton Gup
Greenwood Press
Quorum Books

Abstract: Deregulation and technological change are transforming U.S. commercial banking from an
industry dominated by thousands of small, locally focused banks into an industry where a handful of large
banks could potentially span the nation and control the majority of its bank deposits. This paper
examines the comparative strengths and weaknesses of large and small banks in this new environment,
and outlines the strategic opportunities and threats that new technology – especially the Internet – pose for
U.S. banks. Although the number of small banks will almost certainly continue to decline, we conclude
that well-run small banks should be able to adjust their business strategies to the new environment and
profitably co-exist with large, globally focussed banks.

* DeYoung is Senior Economist and Economic Advisor. Hunter is Senior Vice President and Research
Director. Send correspondence to DeYoung at: Economic Research Department, Federal Reserve Bank
of Chicago, 230 South LaSalle Street, Chicago, IL 60604, telephone: 312-322-5396, e-mail:
robert.deyoung@chi.frb.org. The views expressed here are those of the authors and do not necessarily
reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

Introduction.
Over the past decade we have witnessed tremendous changes in how banks are regulated, how
banks use technology to produce financial services, and how banks compete with each other. At first
glance, these developments – e.g., reduced barriers to geographic entry and expansion, increased
competition from banks in other countries and nonbanks in other industries, less expensive and more
rapid movement of financial information – would appear to favor large domestic and international banks
at the expense of small local banks. But upon further reflection, it seems that well-managed community
banks should be able to turn these competitive threats into opportunities. For example, Hunter (2001) has
argued that progressive community banks might combine Internet distribution, strategic acquisitions, and
alliances with other financial institutions to better exploit the existing informational advantages of their
local branching networks. In this paper, we argue that the banking industry will continue to feature both
large global banks and small local banks into the foreseeable future.
We set the stage for our arguments by first examining how changes in banking regulations,
developments in financial markets, and advances in communications technology over the past two
decades have fundamentally changed the landscape of the U.S. commercial banking industry. We then
analyze the strategic implications of these changes, using a simple competitive strategy framework
introduced by DeYoung (2000). We use this framework to argue that deregulation and new financial
technologies have driven a wedge between large banks and small banks, resulting in an industry
equilibrium with two very different – but both potentially profitable – competitive strategies. Finally, we
consider how widespread implementation of Internet banking will affect this new strategic equilibrium.
We conclude that the Internet has the potential to add value for both large banks and small banks.
For large banks, the Internet naturally complements their large scale operations, cost advantages, and
marketing presence, and if used effectively could help large banks carve away at community banks’
traditional “relationship” markets. For community banks, the Internet naturally complements the high
service quality that they provide to their existing relationship customers, and if used judiciously could
partially reduce their cost disadvantages vis a vis large banks. In the end, mature Internet strategies could

make large and small banks more alike in retail banking markets, reversing the trends of the past two
decades.
Although we conclude that the community banking strategy will remain viable in the future, we
also believe that the number of small banks in the U.S. will almost certainly continue to decline. The
implementation of the Internet is likely to increase competitive pressures further, and while many
community banks will survive and prosper, the less progressive and poorly managed community banks
will not. And while our empirical analyses are based solely on U.S. banking data, we believe our
conclusions also apply outside the U.S. where banks face similar forces of change. Just as deregulation
has allowed U.S. banks to expand across state borders, similar deregulatory acts passed in the European
Union have allowed banks there to expand across national borders. Similarly, the communications and
financial technologies that are transforming the operations of U.S. banks are freely available to banks in
other countries.

1. Geographic deregulation and changes in banking industry structure.
Even if the stock of technology had remained constant over the past 20 years, the liberalization of
U.S. banking laws alone would have resulted in drastic changes in the structure of the U.S. banking
industry. The relaxation and eventual repeal of federal and state banking regulations during the 1980s
and 1990s eliminated the barriers to geographic mobility which had artificially limited the size of U.S.
banks.1 Many U.S. banks took advantage of the new laws and grew substantially larger in a relatively
short period of time, typically via in-market and out-of-market mergers and acquisitions.

The

accumulated effect of these mergers greatly increased the size of the participating banks, and also
substantially changed the overall structure of the banking industry. For example, in 1990 the largest U.S.
1

The Riegle-Neal Act of 1994 eliminated virtually all prohibitions against inter-state banking in the U.S. This act
followed 25 years of ad hoc deregulatory acts by state governments, which had gradually permitted banking
companies to expand across state borders. The European Union passed similar legislation at roughly the same time.
The Single Europe Act of 1986 eliminated all barriers to cross-border resource movements, paving the way for a
single uninterrupted economic marketplace in the EU. The Second Banking Directive of 1989 (implemented in

commercial bank held about $150 billion in assets and the average bank held about $275 million in assets.
One decade and over 9,000 bank mergers later, the largest U.S. bank now holds about $600 billion in
assets and the average bank now holds about $750 million in assets. In addition, a growing number of
large U.S. banks are becoming global players by making acquisitions across international borders.
Figures 1 and 2 further illustrate the dramatic changes in the size distribution of U.S. banks. The
most visible bank mergers are the “megamergers” between two very large and well-known institutions,
like the 1998 merger of Bank of America and NationsBank which arguably created the first nationwide
U.S. retail banking franchise.

But since 1980 only one-in-twenty U.S. bank mergers has been a

megamerger. Most bank mergers have combined two community banks (assets less than $1 billion), and
in many acquisitions the target bank is a community bank. As a result, between 1980 and 2000 the
number of large and mid-sized banks (over $1 billion) remained relatively constant, as did the number of
large community banks (between $500 million and $1 billion). But the number of small community
banks (less than $500 million) has been nearly cut in half, declining from about 11,000 banks to less than
6,000 banks.
Banks have a variety of motivations for making acquisitions. Benefits from increased scale are
the most obvious, including but not limited to: reduced unit costs; higher per unit revenues; improved
access to capital markets; the ability to make larger loans or offer broader product lines; the ability to
attract and retain high quality managers; reduced portfolio risk from diversifying into new geographic
markets; and network benefits from integrating systems of branches and ATMs that cover different
geographic areas.2 For banks that use traditional bank distribution channels, acquiring existing banks is
simply faster and easier than growing internally by building new physical capacity. (As discussed below,
acquiring physical branches may become a less important motivation for bank mergers as banking
products and services are increasingly delivered over electronic banking channels.) Other motivations do
not enhance efficiency. Banks operating in the same local or regional banking markets might merge in
1993) together with several sister acts created a “single passport” for financial firms in the EU, and harmonized
banking regulations across its member states.

order to acquire market power. Bank managers might pursue mergers because managing a large bank
tends to be related to high salaries.3 And banks might pursue absolute size in order to become “too-bigto-fail,” a strategy which, if effective, reduces the bank’s cost of long-term debt financing by eliminating
any default risk premium. 4

2. Increased competition in banking markets.
The impact of geographic deregulation can be thought of as a two-sided coin. One side of the
coin is the increased geographic mobility and growth opportunities for banks. The other side of the coin
is increased competition for incumbent banks located in the target markets. How has the merger wave of
the 1980s and 1990s affected concentration and competition in U.S. banking markets?
Since the mid-1980s, the geographic reach of the typical U.S. bank holding company has more
than doubled. For example, the average holding company affiliate with more than $100 million in assets
was located about 160 miles from its holding company headquarters in 1985; by 1998 this distance had
increased to about 300 miles.5

This increase in the geographic reach of banking companies has

substantially changed the overall structure of the U.S. banking industry, but it has had little effect on the
structure of local markets. The share of the national market held by the ten largest U.S. banks doubled
from about 20% to about 40% over the past two decades, while the Herfindahl index – a standard measure
of market concentration – in the average urban banking market during this time period fluctuated between
1,950 and 2,050 with no clear upward trend. These data reflect that fact that most large bank mergers
have been market extension mergers, in which a target bank is purchased by a bank from outside the local
market.6

For an in-depth review of scale economies in banking, see Berger, Demsetz, and Strahan (1999).
Bliss and Rosen (1999) find evidence of this “managerial hubris” explanation for bank mergers.
4
See Kane (2000) and Penas and Unal (2001) for recent studies that attempt to find explicit evidence of the too-bigto-fail phenomenon. See Benston, Hunter, and Wall (1995) for evidence of the portfolio, or earnings diversification,
motivation for bank mergers.
5
See Berger and DeYoung (2001b).
6
DeYoung (1999) reports that about two-thirds of bank megamergers in the U.S. since 1980 have been market
extension mergers.
3

Even though local Herfindahl indices have remained stable during the bank merger wave,
competition in local banking markets has probably grown more intense. A number of recent studies have
found that local banks tend to operate at higher levels of efficiency after one of their local competitors is
acquired by an out-of-market bank. 7 There are a number of explanations for this phenomenon, all of
which begin with a post-merger change in the behavior of the acquired bank. The new owners of the
bank often replace underperforming managers, reallocate assets to higher yielding investments, slash
expenses, introduce new products and services, cut fees, raise deposit rates, or make numerous other
changes that intensify competitive rivalry in the local market. Local banks either respond in kind or they
lose market share.
By making repeated market extension mergers, large banks find themselves competing in
hundreds of different local markets. Not only are these super-regional banks substantially larger than the
community banks they face in these local banks, their business strategies tend to diverge from those of
community banks. These shifts in large bank business strategies can create important profit opportunities
for community banks. For example, when a large out-of-state bank acquires a small local bank, the
acquired bank often reduces its commitment to small local businesses. These ‘abandoned’ small business
customers provide a growth opportunity for other local banks, or provide a critical mass of business for
new start-up banks to enter.8

3. Advances in financial markets and information technology.
An explosion in the growth of new financial instruments and institutions over the past two
decades has placed increased competitive pressures on commercial banks. Bank depositors now have
access to a vast array of mutual funds as an alternative vehicle for savings and liquidity. Bank borrowers
now have access to a greater set of financing vehicles, like commercial paper for the most creditworthy
firms and junk bond financing for riskier firms. To be sure, the banking sector has grown more slowly as

7
8

See DeYoung, Hasan, and Kirchhoff (1998), Evanoff and Ors (2001), and Whalen (2001).
For evidence of this phenomenon, see Berger, Bonime, Goldberg, and White (1999) and Keeton (2000).

result of these new financial instruments and institutions. But the loss of market share has been limited,
in part, because banks have responded with new financial technologies to create entirely new business
strategies. In many cases, these changes have fundamentally changed the way that banks do business.
For example, by securitizing their loans (rather than holding them in portfolios) banks have
economized on increasingly scarce sources of funds. Similarly, by reorienting their business mix toward
off-balance sheet activities like back-up lines of credit, banks have continued to earn revenues from
business customers that switch from loan financing to, say, commercial paper financing. And banks have
made themselves relatively more attractive to depositors by offering increased convenience (e.g., ATM
machines) and a broader array of investment options (e.g., proprietary or third-party mutual funds).
These changes have greatly affected the composition of bank revenues, particularly at large
banks. A bank with a securitized lending strategy collects little interest income because the loans it
underwrites are not held for long on the books, but it collects lots of noninterest income (e.g., loan
origination fees) because the volume of loans it underwrites increases. Similarly, a bank that writes backup lines of credit (rather than writing loans) receives a fee for this service, but receives interest income
only in the rare case that the client draws on the credit line. And a bank with a large ATM network will
receive fee income from third-party access fees, as well as disproportionate amounts of fee income from
its own customers, who arguably chose the bank because of its large ATM network and are presumably
willing to pay for this convenience.
Figure 3 shows that noninterest income has increased more quickly and to higher levels over time
at large banks than at small banks. This is consistent with different fundamental business strategies at
large banks and small banks. Large banks are more likely originate large volumes of standardized loans
that can be securitized (e.g., auto loans, credit card loans), more likely to charge high fees to retail
depositors, and more likely operate widespread ATM networks that generate fee income. In contrast,

community banks are more likely to make relationship loans to small businesses that generate interest
income year after year, and are more likely to offer low-fee deposit accounts.9
As large banks have embraced new financial technologies, new opportunities have been created
for community banks. One case in point concerns the market for small business loans, a prime product
line for small community banks.10 Although some large banks (most notably Wells-Fargo) have launched
efforts to credit score and securitize small business loans, the idiosyncratic nature of small business
relationship lending is in many ways inconsistent with automated lending technology. Thus, shifts in
large bank strategies toward automated lending may create a business opportunity for traditional
community banks. Similarly, the movement of large banks toward charging explicit (and often higher)
fees for separate depositor services may provide an opportunity for community banks to attract
relationship-based retail customers who prefer bundled pricing.
But innovations in financial technology have also created new challenges for community banks.
Mutual funds, online brokerage accounts, and sweep accounts have provided more attractive investment
options for retail and small business depositors. As a result, core deposit funding has declined for all size
classes of banks, but this decline has been proportionately smaller for community banks.11 Small banks
have fewer non-deposit funding options than large banks (for example, small banks typically do not have
access to bond financing), so this probably indicates that small banks are paying more to attract and retain
core deposits (some combination of higher deposit rates and/or lower fees on deposit accounts).12 This
puts pressure on small bank profit margins, and could constrain growth at these banks.
Developments in communications and information technologies may also help improve the
efficiency of large banking firms. Repeated rounds of market extension acquisitions have left many large
banking companies with numerous branches, subsidiaries, and affiliates located far away from the
9

Federal Reserve System (1997, 1998, 1999).
See Strahan and Weston (1998), Peek and Rosengren (1998), and DeYoung, Goldberg and White (2000) for
details on small business lending and the consolidation of the banking industry.
11
See Genay (2000) for details. Core deposits are typically defined as funds in transactions accounts plus funds in
savings accounts under $100,000.
10

headquarters. It can be difficult to monitor activities at these far-flung installations, and this can result in
increased “agency” costs for banks that have to combat shirking and/or cost-preference behaviors by
managers at locations far away from the headquarters.

Faster and less expensive communications

technologies will likely make it easier to effectively monitor these managers; there is some evidence that
large multi-bank holding companies have become more successful at controlling the operations of their
affiliate banks during the 1990s than during the 1980s. 13

4. Technology and deregulation drive a strategic wedge between large and small banks.
The foregoing discussion described a myriad of ways that deregulation and technological change
have affected the competitive environment in banking. At the risk of over-simplification, we will boil
down these changes to just three parameters: unit costs, product differentiation, and bank size. Following
DeYoung (2000), we use these three parameters to construct the strategic maps in Figures 4 and 5. The
vertical dimension in these maps measures the unit costs of producing retail and small business banking
services. The horizontal dimension measures the degree to which banks differentiate their products and
services from those of their closest competitors. This could be either actual product differentiation (e.g.,
customized products or person-to-person service) or perceived differentiation (e.g., brand image). In this
framework, banks select their business strategies by combining a high or low level of unit costs with a
high or low degree of product differentiation. The positions of the circles indicate the business strategies
selected by banks, and the relative size of the circles indicate the relative sizes of the banks.
The banking industry prior to deregulation and technological advances is illustrated in Figure 4.
Banks were clustered near the northeast corner of the strategy space. The production, distribution, and
quality of retail and small business banking products was fairly similar across banks of all sizes. Small
banks tended to offer a higher degree of person-to-person interaction, but this wasn’t so much a strategic
consideration as it was a reflection that delivering high-touch personal service becomes more difficult as
12

There is evidence consistent with this in the Federal Reserve’s Survey of Retail Pricing and Fees (1997, 1998,
1999), which reports that small banks tend to charge lower fees on deposit accounts.

an organization grows larger. Large banks tended to service larger large commercial accounts, but in
many cases differences in bank size were pre-determined by the economic size of the local market and the
restrictiveness of local branching rules.
But deregulation, increased competition, and new financial technologies created incentives for
large banks and small banks to become less alike. Bank size began to increase, at first due to modest
within-market mergers, and then more rapidly due to market extension megamergers. These increases in
bank size yielded economies of scale, and unit costs fell. Increased scale also gave these growing banks
access to the new production technologies discussed above (e.g., automated underwriting, securitization,
widespread ATM networks), which reduced unit costs further but more importantly changed the nature of
their retail business to a high-volume, low-cost, impersonal “financial commodity” strategy. 14
The combined effect of these changes effectively drove a strategic wedge between the large and
growing banks on one hand and the smaller community banks on the other hand. The result is shown in
Figure 5. Large banks have moved in a southwest direction on the map, sacrificing personalized service
for large scale and producing high volumes of standardized products at low unit costs. This allowed large
banks to charge low prices and still earn a satisfactory rate of return. Although many community banks
have also grown larger via mergers, they have continued to occupy the same strategic ground, providing
differentiated products and personalized service. This allows small banks to charge a high enough price
to earn a satisfactory rate of return, despite low volumes and unexploited scale economies.15

Berger and DeYoung (2001b).
There is an extensive literature on scale and scope economies in the commercial banking industry. See Hunter,
Timme and Yang (1990), Hunter and Timme (1991), Evanoff and Israilevich (1991), Berger and Mester (1997), and
Hughes, Lang, Mester, and Moon (2001) for evidence. This evidence suggests that scale economies are quite
modest for community banks under $1 billion, but that larger banks that produce a different output mix using a
different production technology that yields more substantial economies of scale.
15
Note that large banks so personalize some of their financial services – for example, investment banking or merger
finance to large wholesale clients – but their retail and small business strategies tend to be commodity-like compared
to those delivered by small community banks.
14

5. The introduction of the Internet.
As social pundits and industry analysts are fond of reminding us, the Internet “changes
everything.” In banking, the Internet is changing the strategic landscape in two fundamental ways. First,
the Internet reduces the importance of geography in the production of financial services and the
maintenance of financial relationships. Second, the Internet greatly reduces the cost of delivering most
financial services. From the standpoint of our strategic map (Figures 4 and 5) this raises two compelling
questions: Can community banks use the Internet to reduce unit costs while still providing personalized
services to their customers? Can large banks use the Internet to deliver customized financial services
without abandoning their high-volume, low-cost strategies?
The Internet and bank distribution channels. At its most basic level the Internet is simply an
alternative distribution channel, so clues to how a bank will use the Internet can be gleaned from how it
uses its more traditional distribution channels. Figure 6 shows how the mix of bank distribution channels
has evolved in the U.S. over the past decade; in general, the point of purchase is gradually moving further
from the bank and closer to the customer. The number of bank branches has increased steadily – from
around 60,000 branches in 1990 to more than 70,000 branches in 2000 – while at the same time the
number of U.S. banks has declined substantially. Although some of the new branches offer only a limited
range of services (e.g., supermarket branches), all of them offer person-to-person service. Thus, bank
branches are consistent with the high-touch, highly personalized business strategies of community banks.
The number of ATM locations has increased even faster than the number of branches. ATMs
deliver a more limited array of services, but do so at increased convenience because they are located close
to the customer – a convenience for which many customers are willing pay fees. While ATMs cost the
bank less per transaction than brick and mortar branches, they accomplish this chiefly by replacing human
tellers with automated tellers, and as such they cannot provide personalized service. Thus, an expanded
network of ATMs is more consistent with the arms-length, high-volume, commodity-like business
strategies of large banks.

It is not yet clear whether Internet distribution is more consistent with large bank strategies or
with small bank strategies. Internet web sites offer bank customers increased convenience: banking
transactions can be performed at home, and pairing ATMs with hardwired computer terminals at public
kiosks allows customers to perform Internet transactions while also making cash withdrawals or deposits.
Thus, the Internet distribution channel naturally extends the large bank retail strategy. But the Internet
also fits well with community bank business practices. Because providing and processing an Internet
transaction costs banks just pennies compared to transactions made at its branches, banks can
substantially reduce their costs by encouraging their retail and business customers to migrate (at least
partially) from branch banking to Internet banking. Thus, the Internet distribution channel naturally
complements a community bank’s business strategy by simultaneously reducing its high expenses and
providing its computer-savvy (read: high-value) customers with additional options.
The Internet and switching costs. Historically, both large banks and community banks have felt
that they owned their deposit customers. Banks provided a limited range of financial services to deposit
customers, including primary checking and savings accounts, credit cards, and access to settlement and
clearing procedures. Customers had only to choose a bank, deposit money, and draw on those funds at
some future date. To a large extent these customers were captive – that is, there was little threat that they
would move their deposits to a different bank, because the costs of switching banks generally exceeded
the benefits of switching. There were often few competitors (due to geographic and product market
restrictions); competing banks could not compete freely on prices (due to Regulation Q); and most
banking transactions required visits to physical bank offices (because ATMs, telephone banking, and
Internet banking had not yet been introduced). Most deposit customers simply selected the bank that was
located closest to their homes or work places, and as a result had inelastic demand curves that allowed
banks to charge high prices for financial services. It simply didn’t pay for depositors to switch banks.
But now customers have a wider range of choices. In the days when a customer had to be
physically present to engage in most banking activities, proximity to the bank branch was important. A
bank's best customers – that is, the customers with the most inelastic demand – were those who lived

closest to the branch. But as lower communications costs and near universal access to the Internet have
greatly expanded the geographic area within any given bank's reach, the geographic distance between a
bank and its deposit customers has become less important. Deposit accounts can now be opened over the
Internet without ever visiting a bank or branch office. As a result, customer switching costs are declining
substantially, depositors have become more price sensitive, and this reduction in demand elasticity has
sharply reduced bank pricing power. At the same time, deregulation (which allowed market entry by
other banks) and financial market innovations (such as checkable money market mutual funds) have
increased the number of financial institutions to which depositors can switch. Banks are having to rethink
their deposit and retail banking business, and relearn how to exploit their increasingly tenuous deposit
relationships to create rents for the bank.
However, there is a great deal of inertia among deposit customers. Many customers still prefer to
use bank branches for as depositing checks, despite the fact that ATM machines can produce records just
as well as tellers in manned branches. Similarly, customers who are perfectly willing to use ATMs are
often unwilling to conduct basic banking transactions over the Internet. This hesitancy to use new
banking technologies will undoubtedly fade as time passes, as the cost of contacting and switching to
competing financial institutions continues to fall, and as local bank customers move up the technological
learning curve. But until that happens, depositor inertia may provide a window of opportunity for banks
to impose new switching costs on these depositors.
The Internet and cross-selling financial services. One way to increase the switching costs of
local deposit customers is to embed them even more firmly in the local branch network. Banks can do
this by cross-selling an array of products to these customers, with the goal of making the branch network
the customer’s primary gateway to financial services. This is advantageous for the bank, because the cost
of switching to a different bank increases with the number of services the customer accesses through the
bank. Providing personal advisory services for these customers is an excellent, albeit costly, way to do
this because it builds human bonds that are hard to break. Another approach is to offer a variety of
services in a manner that makes them appear seamless – for example, a bank can link a home equity loan,

a credit card, an overdraft facility, direct payroll deposits, insurance services, and perhaps even automated
payment services to these customers’ deposit accounts, and present a consolidated statement to the
customer at the end of every month.
Once these relationships have been solidified – that is, once the switching costs of local branch
depositors have been increased by binding these customers even more closely to the bank – the bank can
safely begin to wean these customers from the branches and migrate them to Internet distribution. This
has three benefits for the bank. First, Internet transactions are less expensive to produce than branch
transactions. Second, once customers begin to use the Internet, the bank can widen the gateway further
by linking customers to even more cross-selling opportunities. Third, the specialized computer software
required for the customer to gain access (which the customer must install, initialize, and learn to use) acts
as yet another switching cost.
Cross-selling a vast array of financial services can require a bank to operate at a large scale and/or
have a high degree of financial expertise. So this raises the interesting question: Should community and
regional banks offer access to more than their own in-house products and services? The answer is: They
should, and not simply because the bank will become more attractive as an access point if it offers the
best services. By offering other firms' services, banks also make a commitment to customers that they
will not be over charged, ripped-off, or gouged later if they lock themselves into their banks. (Economists
call this technique “second sourcing.”) Moreover, the banks are in a position to extract rents from the
other services providers, not vice versa, because it is the banks that control the unique assets: captive
customers and the access gateway.
This approach has been followed successfully by the discount brokerage firm Charles Schwab.
With its mutual fund OneSource product, Schwab allows customers access to over 1,100 mutual funds
from over 100 fund families.

Schwab consolidates all fund statements into one statement for the

customer. Fidelity’s decision to withdraw most of its popular mutual funds from OneSource suggests that
Schwab has the market power because it controls access to the customer.

The Internet and electronic payments. Payments services have always been a primary service
provided by banks, and access to the payments system is central to the value of a banking franchise. The
Internet will eventually cause a sea change in the production of payments services – away from physical
checks, toward electronic impulses – and this change could have a potentially large and negative strategic
impact on community banks.
Most analysts agree that payments provision is a high fixed cost/low variable cost business. In
high fixed cost industries, service providers have an incentive to acquire a large share of the market,
because this allows them to spread their high fixed costs over a larger base of customers. In addition,
gaining a dominant market share in payments might allow a firm to establish industry standards for
hardware or software (a good example from the computer industry is Microsoft Windows), giving it a
competitive advantage over new entrants who must adopt these standards in order to access to the system.
Being a dominant firm in payments may also allow the firm to exploit scope economies (for example, if
the payments infrastructure could also be used to collect useful demographic or financial data) or
economies of sequencing (for example, if the payments infrastructure can be integrated with the bank’s
other data systems) that give it cost advantages over competitors in other product markets.
If electronic payments provision does become concentrated in a handful of few large financial
institutions, standard economic theory suggests that these firms will be able to exploit monopoly power.
Dominant firms will not face much competition, because entry is unlikely: a failed attempt at entering the
business will saddle the prospective entrant with large sunk costs. In addition, financial institutions with
large market shares – and thus low unit costs – in this segment may be able to exploit their positions by
engaging in limit pricing that further reduces the chance of competitive entry. Thus, small banks may be
at a disadvantage in offering electronic payments to their customers. Being too small to economically
produce the service themselves, they may have to pay high prices to dominant firms in order to purchase
electronic payments on behalf of their deposit customers. Furthermore, the dominant providers may be
able to extend their monopoly power in payments services into more traditional banking services.

The Internet and overarching bank strategies. If banks use the Internet mainly as a substitute
for, or as a complement to, more traditional distribution channels, then the current strategic banking
environment will not materially change. If anything, deploying the Internet in this way might drive the
strategic wedge illustrated in Figure 5 even deeper. Large banks could expand their customer base
without having to acquire other banks, and without having to operate their expensive branch networks.
This would hasten the ongoing process of increased size, lower unit costs, and greater product
commoditization at large banks, and would carry them even further to the southwest in the strategy space.
In this scenario, large banks would be even less attractive for the high-value, relationship-based target
customers of community banks. Community banks would be able to maintain their profit margins
without cutting their costs, and as a result they could simply use the Internet as a complement to their
existing branch networks, offering only a limited array of convenience services at their websites.
Community banks would remain pinned in the northeast corner of the strategy space, producing high-cost,
customized services for local customers.
However, if banks deploy the Internet more thoughtfully, they may be able to move closer to the
highly profitable southeast corner of the strategy space, as shown in Figure 7. The southeast corner
dominates all other strategic positions because banks that locate there can charge high prices for
differentiated products, and can produce those products at a low unit costs. So we reiterate the two
questions we asked at the beginning of this section: Can community banks use the Internet to reduce unit
costs while still providing personalized services to their customers? Can large banks use the Internet to
deliver customized financial services without abandoning their high-volume, low-cost strategies?

6. Community bank strategy.
The massive reduction in the number of U.S. community banks since 1980 does not signal a lack
of viability for the community bank business model. Primarily, it indicates that a history of regulatory
entry barriers left the U.S. with too many community banks. Thousands of poorly managed banks were
protected from competitive pressure, and when barriers to geographic and product market entry were

lifted the least viable community banks (the poorly managed, the poorly located, or the otherwise just
plain unlucky) exited the market, while well-managed community banks flourished.
Thousands of U.S. community banks are indeed flourishing. Figure 8 displays the annual average
profitability between 1985 and 2000 for best-practices community banks. (We define “best-practices”
endogenously, as banks that earn return-on-assets equal to the 75th percentile for their size group.) Large
best-practice community banks have consistently earned returns equal to or exceeding those of the typical
large commercial bank over each of the past 10 years.16 Small best-practices community banks have
earned slightly lower returns – evidence that scale economies exist for community banks – but still have
been quite competitive with returns at the typical large commercial bank. So despite the problems that
face community banks – the increasing competitive pressure, the declining bank numbers, the small scale
of operations, and the problems retaining core depositors – there is plentiful evidence that the community
banking strategy can be a profitable one.
Table 1 investigates the sources of high and low profitability at large banks and community banks
over the past five years. On average, the data suggest that poor performance at community banks is
attributable to inefficient operations, not to any fundamental weakness in the community bank business
model. On one hand, both highly profitable community banks (represented by banks above the median)
and moderately profitable community banks (represented by all banks) tended to use high amounts of
core deposit funding and tended to generate low levels of noninterest income – two of the items identified
above with the technology-based wedge between large bank business strategies and community bank
business strategies. On the other hand, highly profitable community banks were more likely to have high
loans-to-asset ratios and low noninterest expense ratios – two measures typically associated with efficient
bank operations. Thus, the data are consistent with recent research on managerial efficiency at U.S.

The returns displayed in Figure 7 are book returns, and are not adjusted for risk. It is not possible to compare riskadjusted earnings because the stocks of most community banks do not trade publicly. However, the intertemporal
variability in the Figure 7 data suggests that community bank earnings are less risky than large bank earnings –
hence, on a risk-adjusted basis, Figure 7 may understate community bank returns relative to large banks. DeYoung
and Roland (2001) provide evidence that large bank business strategies (e.g., increases in fee-based activities)
reduce earnings stability.

banks, which consistently finds that the potential benefits from eliminating cost, revenue, and production
inefficiencies at poorly run banks can outweigh the potential benefits from increasing the size of small
banks.17
These historical data bode favorably for the competitive viability of community banks. But
community banks may face even greater challenges in the future. The structural fallout from geographic
deregulation is not yet complete, and consolidation will likely continue to reduce the number of
community banks in the U.S. As with past mergers, most future mergers will likely combine community
banks with each other, and will generate efficiencies not only by eliminating poorly performing target
banks but also by increasing the scale of the combined banks.

This increase in scale within the

community bank population may prove to be more important than in the past, as academic studies have
found that minimum efficient bank size tends to increase with technological change.18 Further advances
and wider implementation of the Internet and other communications technologies will continue to reduce
switching costs, making it increasingly difficult for community banks to hold on to their best customers.
How can well-managed community banks best respond to these challenges? They should not
abandon their core strategy of delivering high-value-added, relationship-based services – rather, they
should adjust this core strategy to make it work better under the new technological, competitive, and
financial conditions.
More centralized decision-making.

For most banks, the optimal organizational structure

combines some degree of centralized decision-making authority with some degree of decentralized
decision-making authority. 19 Decentralized authority gives the operations side of the bank the flexibility
to exploit local market information advantages, while centralized authority allows the product side of the
bank to exploit opportunities for product synergies, scale economies, and innovation. Banks at the very
extremes of the strategic map may not find such a combined strategy useful:

a very large and

See Berger, Hunter, and Timme (1993) and Berger and Humphrey (1997) for reviews of this literature.
See Hunter and Timme (1986, 1991) for a discussion of technological change and minimum efficient bank size.
19
See Hunter (1995) for an examination of the importance of centralized versus decentralized decision-making in
large and small banks.
18

geographically dispersed bank that sells completely standardized financial products has little need for
local information gathering or decision-making (e.g., a credit card bank), while a very small community
bank that personalizes all of its retail and small business relationships has little need for centralized
command and control type decision-making. But banks that wish to migrate from these extreme corners
of the strategic map toward the more profitable southeast corner will likely benefit from a mix of
centralized and decentralized decision-making.
As a first approximation, decentralized decision-making is a good fit for community banks,
because it keeps bank decision-makers in close proximity with the customer and with local information.
To be sure, decentralized decision-making also has some potential disadvantages: branch office managers
can misuse the autonomy granted to them by senior management, and maintaining a decentralized
approach may mean foregoing opportunities for scale or scope economies in certain product processes.
But these types of problems are less severe for community banks in the first place, because small banks
are less likely to have internal information and management control (agency) issues, and because they
have relatively limited access to economies of scale and scope.
However, as we move into a more integrated electronic and Internet banking world in which
geographic location is less important for defining a bank's customer base, maintaining a decentralized
decision-making approach may become less important for community banks. For banks that possess
special localized knowledge about their markets – but recognize that retail customers in an Internet
banking world will have fairly low switching costs – a combined strategy of decentralized operational
decision-making and centralized product decision-making may make more sense.
Outsourcing and affiliations. Because they lack significant scale, community banks will always
be at a cost disadvantage relative to large banks. Some small banks have attempted to mitigate their lack
of scale by outsourcing back office operations to large scale venders (to reduce unit costs) or by affiliating
with large scale providers of nonbank financial services (to provide their customers with broader access).
However, when attempting to circumvent the weaknesses of their small-scale and decentralized strategy,
community banks must be careful. Outsourcing must be done without sharing a substantial portion of

their profits with the outsourcing venders, and without having their a substantial portion of their
customers captured by the access providers. More fundamentally, focussing too closely on scale can be a
strategic mistake for community banks because – as illustrated in the strategic map analyses – large scale
operations can be antithetical to relationship-based services, and community banks over-reaching for
scale can easily lose their core strategic advantage.
Internet implementation. The Internet can be an opportunity for community banks as well as a
threat. On one hand, community banks are unlikely to successfully use the Internet to acquire new
customers, because small banks cannot afford the high advertising expenditures necessary to support a
web-based marketing campaign. (One of the ironies of e-commerce is that advertising in the print media
and on television is often needed to attract customers to a new web site.) On the other hand, it is
absolutely crucial for community banks to offer transactional web sites in order to retain their existing
high-value customers, who are willing to pay high prices for differentiated, highly personalized products
and services, but who also want the flexibility and convenience of performing some of their financial
transactions over the Internet.
In some ways the Internet may level the playing field between large banks and small banks. The
expense of setting up a basic transactional web site is relatively low, which allows small banks to offer
their basic retail customers a web channel that is competitive with those offered by larger banks. Once
the web site is in place, community banks could reduce their unit costs by eliminating some of their
expensive brick and mortar branches locations. This must be carefully done, because overdoing this costcutting strategy could diminish the branch-based, person-to-person contact upon which the community
banking strategy is based; in other words, community banks cannot run the risk of getting too far out in
front of the migration of captive, inertial local branch depositors to the Internet. But as time passes, the
Internet should allow community banks to stay in close touch with their high-value customers while
selectively pruning their physical plant and personnel overhead.

7. Large bank strategy.
The continuing movement of large banks from the northeast corner to the southwest corner of the
strategic map is to some extent a self-fulfilling prophecy. These banks have grown large via merger, and
achieving scale economies is typically among the announced objectives of these mergers – indeed, this is
backed up by recent studies that find opportunities for significant economies of scale at regional, superregional, and global banks. 20 Larger banks also they tend to sell a non-traditional mix of services, using
production and distribution techniques that give them access to deep scale savings but that require higher
operating leverage (lower per unit expenses but higher fixed expenses).21 The most extreme cases of this
are “mono-line” banks that employ new financial technologies to specialize in a single standardized
product (e.g., credit card banks, mortgage banking) which enjoy scale economies out to very large sizes.22
But standardized (i.e., undifferentiated) products do not command high prices, so for large banks the path
to higher profits requires continued growth to capture additional scale-related savings.
Another reason that the profit margins of large banks rely so much on cost reductions is the
plentiful competition among large banks in most retail and wholesale markets.

Scale and scope

economies typically have important implications for the structure of an industry – if such economies are
substantial, an industry will tend to be relatively concentrated and entry will be difficult. But despite the
large cost savings apparently available from increased size in banking, there is currently little evidence of
market power for large banks in U.S. banking markets. As long as industry consolidation does not
devolve into a tight oligopoly and pricing power – and currently there is little reason to expect this, given
continued entry by large domestic banks, large foreign banks, and de novo banks – there should continue
to be pricing pressure on large and small banks alike. In such a world, a bank cannot raise its prices
unless the products they are selling are differentiated from their competitors’ products.
20

See Berger and Mester (1997) and Hughes, Lang, Mester, and Moon (2001) for evidence.
Hunter, Timme and Yang (1990) and Hunter and Timme (1991) provide evidence that large and small banks use
entirely different production functions; their research suggests that efficient scale for community banks is well
below efficient scale for large banks. DeYoung and Roland (2001) discuss in detail the implications of operating
leverage at commercial banks.
21

Limits to scale. Like all physical phenomena, there are limits to scale-related gains: at some
point, the unit cost curve must stop declining. But interpersonal phenomena may be more limiting than
physical phenomena in this regard. As discussed above, when business units move further away from
headquarters it becomes more difficult to control their activities.23 This could be one of the reasons why
researchers simultaneously find significant potential gains from increased bank size, but that most large
banks do not fully exploit that potential. 24

These difficulties are amplified at cross-border banks: in

addition to the problems of managing a geographically diverse company, cross-border banks must
overcome differences in language, culture, currencies, regulations, and local business practices that could
drive up costs, depress revenues, or hamper growth.25
As time passes, improved technology is likely to partially mitigate the operational and managerial
problems of distance. For example, there is evidence that improved communications technology has
allowed banking customers to move further away from their banks, challenging the idea that local
proximity – and thus small bank size – is necessary for a strong banker-borrower relationship. 26 There is
also evidence that advances in communications technology are allowing banks to better control the
operations of their affiliates as these offices move further away from the headquarters.27
Imposing centralized decision-making authority may also help mitigate the agency costs found in
large, geographically dispersed banks. In many ways, a centralized management model goes hand-inhand with the ongoing movement of large banks from the northeast corner to the southwest corner on the
strategic map. Centralization is consistent with standardized products and services; centralization seems
like a natural way to limit agency costs as an organization grows in size; and centralization may become
easier to implement as new technologies allow headquarters managers to better communicate in real time
with branch managers. Barnett Bank and Bank One are two examples of U.S. banking companies that
22

See Rossi (1998) for evidence of mono-line scale economies in mortgage banking. See Jones, Lang, and Nigro
(2001) for evidence of recent consolidation in the loan syndication business.
23
See Berger and DeYoung (2001a).
24
See Hughes, Lang, Mester, and Moon (2000) and Demsetz and Strahan (1997).
25
Berger, DeYoung, Genay, and Udell (2000) provide evidence that banks tend to do poorly when operating abroad.
26
See Petersen and Rajan (2002) and Cyrnak and Hannan (2000).

switched from very decentralized strategies to more centralized strategies as they grew larger: separately
chartered bank affiliates were converted into branch offices and decision making authority was moved
from local managers to headquarters management.
Less centralized decision-making. Although centralization has its merits, there are two reasons
why a completely centralized organizational strategy is unlikely to be optimal for large banking
companies.28

Complete centralization works well for a company like McDonald's which never

customizes its products to fit individual consumer needs, but it can be costly in the banking industry
where gathering and processing unique customer information is a core competency. Maintaining at least
some degree of decentralized decision-making authority would seem to be essential for banks, because
creating and capturing new profit opportunities in banking frequently depends on keeping bankers in
close (and fast) touch with local customers and local information.
Furthermore, ongoing reductions in customer switching costs (discussed above) are likely to
reduce the future effectiveness of centralized decision-making. With customers that can switch easily
among multiple financial service providers, it will become increasingly difficult for banks to make
significant profits by selling traditional banking products on a commodity basis; in other words, the
southwest corner of the strategy space becomes less attractive. In such a world, retaining high-value
customers requires more personalized products and services (a movement toward the southeast corner of
the strategy space), which in turn requires more decentralized decision-making authority within the bank.
A potentially profitable strategy for large banks may be to offer all customers a choice of a wide menu of
standardized products and services (which emerge from a centralized product and services strategy) but to
also offer personalized financial service and advice, along with customized pricing, for certain products
and customers deemed to be high value-added (this emerges from a decentralized operations strategy).
Innovation. As large banks exhaust all the potential gains from increased scale – or after they
grow so large or so geographically diverse that their agency problems become unmanageable – large
27

See Berger and DeYoung (2001b).

banks will have to change course and concentrate on strategic advantages that are not directly related to
size. Instead, a change in strategy aimed at the potentially profitable southeast corner will be in order.
How might large banks maintain their low cost advantages while simultaneously providing more
personalized products and services that yield higher prices?
Innovation is one potential path. However, most product innovations on the retail side are easily
imitated and quickly replicated by competitors, so any first mover advantages are likely to be fleeting.
Unless the innovation is proprietary, or unless it can be linked to a strategic behavior that discourages
rival firms from competing against the innovating firm, the innovation must be continuous, which is both
expensive and unpredictable.
One potentially long-lasting innovation is to identify areas of high transaction cost and to reduce
those costs by internalizing the transactions. To the extent that there are first-mover advantages in this
approach, the bank can build a long-term franchise. For example, Citibank has recognized that there are
still very high costs in making cross-border payments. By setting up a global network of branches and
developing tremendous expertise in foreign exchange transactions, it has internalized cross-border
payments. The savings in transactions costs coupled with the very high volume of transactions make this
a very profitable franchise. Moreover, others banks are unlikely to challenge this franchise because of the
high costs of setting up a competing network, and the formidable position now occupied by Citibank.
Another possibility is to use innovation to build a captive customer base. This is, in a sense, what
Charles Schwab has done. It was on of the first brokerages to allow customers to trade electronically. In
the process, it cross-sold a variety of products, including information services and mutual funds services
that locked the electronic customer into a relationship with Schwab. At the same time, these customers
give Schwab the scale to pursue further innovation.
Internet implementation.

The current conventional wisdom is that both large banks and

community banks will combine the Internet channel with their traditional brick and mortar branches,

See Hunter (1995) for evidence on the general efficiency of centralized and decentralized organizational forms in
banking.

using a “click and mortar” distribution strategy. 29 An alternative approach is the Internet-only, or “virtual
bank,” distribution strategy that eschews brick and mortar branches altogether. Only a few Internet-only
banks are operating in the U.S., and to date these banks have not performed well – but Internet-only banks
are using a very new business model, and it is possible that both these banks and their customers are only
just learning how to efficiently use this model, and that financial performance will improve in the future.30
If the Internet-only delivery model ultimately proves to be profitable, it would seem to be well-suited for
banks that have the capacity to offer large volumes of low cost, standardized products and services.

8. The future: A new competitive environment
At some point in the near future the bank merger wave will finally subside. When it is finished,
the market structure of the banking industry will no longer reflect the historical restrictions on geographic
and product market mobility. At that point, the banking industry will more closely resemble non-banking
industries in an important strategic dimension: growth by internal expansion will become a viable
strategic alternative for banks, because in the new industry equilibrium there will be fewer easy
opportunities to grow by acquisition. Under these more “normal” industry conditions, the Internet will
play an expanded and more complicated strategic role.

Internal growth strategies typically require

increased advertising and marketing expenditures, and this is an area where deep-pocketed large banks
have a clear advantage over small community banks. When large banks exhaust their opportunities to
grow via inexpensive acquisitions, their strategic growth objective will switch from wholesale acquisition
of other banks to the acquisition of individual customers of other banks.
Large banks will have two sources of customers. At one extreme the large banks will compete
for each other’s customers in a kind of zero sum game, consuming any cost or productivity gains by
reducing prices. In this scenario large banks remain mired in the southwest corner of the strategy space,
29

Furst, Lang, and Nolle (2000) find evidence that click and mortar banks are more profitable than traditional brick
and mortar banks. Sullivan (2000) concludes that click and mortar banks are no less profitable than traditional
banks.

selling commodity-like services at low margins and relying on innovation and increased scale to drive
down unit costs. Community banks will have uncontested access to the highly profitable southeast
corner, although they may or may not be able to occupy it. At the other extreme the large banks will
compete for the customers of the community banks, perhaps using the informational potential of the
Internet to target high-value community bank customers, and offering them customized or semicustomized financial services at relatively low prices. In this scenario large banks will migrate towards
the more profitable southeast corner of the strategy space, and the market share of community banks will
shrink.
Continued technological change in the banking and financial services industry and in electronic
or Internet banking are inevitable. The degree to which large banks are successful – and the hence the
amount of profitable market share ultimately retained by community banks – may depend on how well
both sets of bankers can harness the benefits of new technology in an increasingly competitive and fully
deregulated environment. These changes pose great challenges and offer potential opportunities for
community bank, regional banks, and large banks alike. Is new banking technology more likely to allow
large banks to personalize their product offerings while maintaining the cost advantages of large scale
production? Or is new banking technology more likely to allow community banks to overcome the cost
disadvantages of small scale production while maintaining their traditional, personalized approach to
banking? The data and analysis presented above suggest a future with far fewer community banks than
exist today, but they also suggest a future competitive equilibrium in which a relatively large number of
community banks remain viable alongside a relatively small number of increasingly large banks.

DeYoung (2001a, 2001b) finds that new Internet-only banks perform poorly relative to other new banks, but he
also finds some evidence in support of the proposition that Internet-only banks are moving up a steep learning curve.

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Figure 1
U.S. Bank Mergers, 1985-1999.

4.9%

55.4%

39.7%

Acquirer is large or mid-sized, target is large or mid-sized (4.9%).
Acquirer is a community bank, target is a community bank (55.4%).
Acquirer is large or mid-sized, target is a community bank (39.7%).

Source: FDIC.
Notes: Large banks have more than $10 billion in assets. Mid-sized banks have between $1 billion and
$10 billion in assets. Community banks have less then $1 billion in assets. Assets are in 1999 dollars.

Figure 2
Number of U.S. Commercial Banks, 1980-1999.

12,000
10,000
8,000
6,000
4,000
2,000
0
'81

'83

'85

'87

'89

Small community banks.

'91

'93

'95

'97

'99

Large community banks.

Large and mid-sized banks.

Source: FDIC.
Notes: Large banks have more than $10 billion in assets. Mid-sized banks have between $1 billion and
$10 billion in assets. Large community banks have between $500 and $1 billion in assets. Small
community banks have less then $500 million in assets. Assets are in 1999 dollars.

Figure 3
Noninterest Income-to-Net Revenue.
Annual averages for various sized U.S. Commercial Banks, 1985-2000.

0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
'84

'86

'88

'90

'92

'94

'96

'98

'00

Small Community Banks

Large Community Banks

Mid-sized Banks

Large Banks

Source: Authors’ calculations using data from the Reports of Condition and Income (FDIC).
Notes: Large banks have more than $10 billion in assets. Mid-sized banks have between $1 billion and
$10 billion in assets. Large community banks have between $500 and $1 billion in assets. Small
community banks have less then $500 million in assets. Assets are in 1999 dollars.

Figure 4
Strategic Map of Commercial Banking (pre-deregulation).

high

COSTS

low
low

PRODUCT DIFFERENTIATION
(personal service, brand image)

Source: DeYoung (2000).

high

Figure 5
Strategic Map of Commercial Banking (post-deregulation).

high

COSTS

low
low

PRODUCT DIFFERENTIATION
(personal service, brand image)

Source: DeYoung (2000)

high

Figure 6
Distribution Channels for U.S. Commercial Banks, 1990-2000.

14,000

300,000

12,000

250,000

10,000

200,000

8,000
150,000
6,000
100,000

4,000

50,000

2,000
0

0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Banks (left)

Internet (left)

Branches (right)

Source: DeYoung (2001).
Notes: Internet includes only fully transactional websites.

ATMs (right)

Figure 7
Strategic Map of Commercial Banking (post-Internet).

high

COSTS

?
?

low
low

PRODUCT DIFFERENTIATION
(personal service, brand image)

Source: DeYoung (2000).

high

Figure 8
Return-on-equity.
Best-practices community bank averages versus large bank averages.

20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
1985

1987

1989
1991
1993
1995
1997
Large Banks, median
Small Community Banks, 75th percentile
Large Community Banks, 75th percentile

1999

Table 1
Community banks versus large banks.
Selected financial ratios, mean values over 1996-2000 period.

Large banks

Small community banks
All
Above median ROE

Large community banks
All
Above median ROE

Return-on-Equity

0.1653

0.1267 HHH

0.1748 **

0.1431

HHH

0.1832 ***

Loans-to-Assets

0.6469

0.6207 HHH

0.6426

0.6304

0.6342

Noninterest Expense-to-Net Revenue

0.6013

0.6133

0.5646 HHH

0.6040

0.5776 HHH

Core Deposits-to-Assets

0.4749

0.7286 ***

0.7387 ***

0.6785 ***

0.7258 ***

Noninterest Income-to-Net Revenue

0.3967

0.1684 HHH

0.1800 HHH

0.2192

HHH

0.2229 HHH

Source: Authors’ calculations using data from the Reports of Condition and Income (FDIC).
Notes: Large banks have more than $10 billion in assets. Large community banks have between $500
and $1 billion in assets. Small community banks have less then $500 million in assets. Assets are in
1999 dollars. The superscripts ***, **, or * (HHH, HH, or H) indicate that the community bank mean is
significantly higher (significantly lower) than the large bank mean at the 1%, 5%, or 10% levels.

Full text of Working Papers (Federal Reserve Bank of Chicago) : Deregulation, the Internet, and the Competitive Viability of Large Banks and Community Banks, Working Paper 2001-11

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